Don't be a sucker when it comes to stocks
Updated March 22, 2008. Edits explained at the end of the post. - ST
I was reading a news item about the resignation of Mathstar's chief financial officer. I was surprised to see a publicly traded semiconductor company I'd never heard of, so I checked it out.
Turns out that Mathstar is like a number of companies I've come across over the years: they come in under the radar screen and, as such, investors think they've found something special.
Sure, these companies are special, but not in a good way.
(Credit:
Mathstar)
Mathstar markets itself as a development-stage fabless semiconductor company. Its products are called field-programmable object arrays, or FPOAs, and are targeted at high-performance, data-intensive applications like defense, security, medical imaging, and video.
Sounds good, right?
Then why is the stock trading at about half a buck with a whopping market cap of $23 million? Good question.
According to my research, the company's market cap may be $23 million too much. In 2007, the company had record revenue of--get this--$558,000. You read it right. But the annual net loss was a hefty $20 million. The company has burned through more than $100 million of investment capital, to date.
Strangely, the company wasn't trying to hide anything when it went public. Its S-1 prospectus said, "We do not know whether or when we will be able to generate significant product revenue or become profitable."
Mathstar indeed went public in October 2005, raising $12 million by selling 2 million shares at $6 a pop. The offering's underwriter was Feltl & Co., a securities broker based in Minnesota.
Today, Mathstar's share price is down more than 90 percent since its IPO. The institutional investors that bought into the public offering aren't just suckers, they're incompetent suckers. I say that because they're not playing with their own money; their funds invest other people's money. Sad but true.
Don't get me wrong: pre-revenue IPOs still happen, especially in the biotech industry. In that instance, investors know they're taking a big risk for big upside rewards. In the case of Mathstar, however, investors got the risk without the big potential upside.
The company essentially used the public markets in place of what should have been a round or two of venture funding. It makes you wonder why they didn't go the private route. Maybe they tried and couldn't. Something to think about.
I thought this kind of thing went out with the Internet bubble, but I guess I was wrong. There are apparently still plenty of suckers left out there.
This is just an example of a phenomenon we see from time to time: a company manages to go public when there's no logical reason for institutional investors to buy into it. These companies typically raise a few million bucks and then, in agonizing slow-motion, fizzle out of existence.
The big question, of course, is what can investors do to avoid disasters like these? Well, three things come to mind.
First, if it sounds too good to be true, it probably is.
Second, if it's coming in under the radar screen, there's probably a good reason for that.
Third, successful investors don't take huge risks unless there's a very good reason to do so, and a sales pitch by a Midwestern investment bank about a company with no revenue certainly doesn't qualify as a good reason.
Bottom line:
There are thousands of companies with cool technology, but only a small percentage of them will end up providing good returns to shareholders. If you don't know how to pick them, odds are you'll end up losing. After all, an IPO only takes an underwriter and enough suckers to buy the stock. Don't be one of them.
Modification: Deleted paragraph 15. It listed a number of companies that, in my opinion, also fit the bill. However, that ruffled some feathers, specifically because my metrics were subjective. As we know from investing 101, past performance is not a guarantee of future results. As such, stock performance to date certainly does not tell the entire story of a company's potential. Consistent operating growth and a solid balance sheet should eventually be reflected in share price, one would hope.
Also, much of what I write is commentary and I've been wrong before. If you ask my wife, she'd probably say I'm occasionally right.
Steve Tobak is managing partner of Invisor Consulting LLC. He is a member of the CNET Blog Network, and is not an employee of CNET. Disclosure. 
Good luck!!
I would encourage you to practice ethical journalism when making such broad statements. Please take a look at Patriot Scientific, understand their history where they tried to market a product using the patents they own, only to be pushed out by the bigger chip manufacturers. Today they only seek what is rightfully theirs and many years over due, and they are successfully accomplishing this with the help of TPL. Based on your statements above, I would say that both you and CNET are against the American concept of entrepreneurship (Moore and Fish) and the right to realize/gain benefit for ones efforts. It would appear that both you and CNET are biased solely in favor of your sponsors, writing inaccurate reports without completely understanding the story you tell. This leads me to believe that this type of reporting is also reflected in CNET?s product reviews; therefore eliminating any faith I previously had in what I considered to be a valuable resource of information. Please be professional and retract your uneducated statements or I personally will never use this site again, and will greatly encourage others to not use this site as well.
Respectfully,
I used to be a CNET customer?
In fact, I was asked to meet with one of the company's board members, as a favor, last year. I know its situation quite well. So yes, I do research the companies I write about.
Nevertheless, I deleted the paragraph.
Steve Tobak
And why do you think that happened? Would you consider the possibility that large companies have been infringing Patriot's patents for the last decade or so? Patriot failed to sell its products because large companies decided it was easier to steal the technology. It's only in the last couple of years that Patriot has been able to persuade those companies to actually pay for the intellectual property those failed products represented. Pardon me for thinking that you don't understand this story at all.
And by the way, I'm not an employee of CNET.
Steve Tobak
Glad you removed the paragragh that caused some "indigestion" even to short term holders. ~.o All good things.
Best to all,
Steve Tobak
Also, Train Wreck is the name of the blog and the paragraph you refer to has been deleted.
Steve Tobak
- by eman1717 March 24, 2008 9:40 AM PDT
- Great point CaptainGus.
- Like this Reply to this comment
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(14 Comments)Nice to see that Steve removed the paragraph....im still curious how/why Steve just happen to select PTSC out of hat for this article.
Appreciate the fact that this is cleared up and moving forward.... always enjoy CNET...
Up and to the Right.....